The Chinese Energy Card

As we speak, there is a massive opportunity unfolding in the energy sector.

It involves a move made by the Trump Administration in a contentious trade hassle with China.

For months, Washington has been seeking to level the playing field, arguing that China has unfairly benefitted from central government support in exporting to the U.S. while preventing American companies from competing in the Chinese domestic market.

In response, Trump introduced heavy import tariffs on aluminum and steel, but the impact was removed from most European and U.S. allies.

That put the sights squarely on Beijing.

The impact quickly morphed into over $150 billion of Chinese goods in a wide variety of product categories.

A full-blown trade war seemed on the horizon.

Then, over the weekend, the tension suddenly stopped when a truce was announced.

And I’m here to show you how this complex trade truce is going to funnel billions of wealth into the energy sector.

Better yet, I’m going to show you exactly how to profit from it…

The Trade Truce

On Saturday, Treasury Secretary Steven Mnuchin announced that the tariffs against China were to be suspended.

The markets responded with a sigh of relief yesterday, with the indices moving up sharply throughout the day.

My network of contacts had been signaling the development since late last week.

China has offered an olive branch too good for the White House to ignore.

It plays to one of Trump’s strengths…It serves to improve a main sector of the American economy, while at the same time providing a basic need of the Chinese industrial infrastructure.

There has been no official declaration, but this is what my folks have been telling me.

The Tangible Benefits

First, LNG spot markets expand the effect of exports by expanding the end user markets serviced.

Second, spot prices will decline, putting pressure on current long-term, take or pay (having to accept a certain amount or pay as if a customer had done so), pipeline contracts pegged to the price of oil.

Both of these developments are to the advantage of an energy-hungry China and provides the potential for some nice additional profits for U.S. producers.

But there is also another aspect that has a tangible benefit.

Trump’s decision to scrap JCPOA and renew sanctions on Iran will increase uncertainty in China by calling into question both the amount of Iranian oil exports that can reach China and the cost of that oil.

Similarly, the renewed sanctions will make it difficult for Teheran to ramp up LNG projects.

Beijing needs both oil and gas to fuel its ongoing industrial expansion.

Moving toward U.S. supply has a further geopolitical advantage for China beyond providing a remedy to the uncertainty over Iran’s ability to export.

It would allow a competitor in the continuing Chinese desire to lower what it pays for imports from Russia.

European Resolve and the Political Chess Match

America’s European allies and the EU are livid over the JCPOA decision.

There will be moves to insulate European companies from American secondary sanctions while London, Berlin, Paris, and Brussels try to save the nuclear agreement without the U.S.

It is even possible that European governments will subsidize their own companies in trade with Iran while paying Bank Markazi (the Iranian Central Bank) directly to evade U.S. sanctions on banking access.

However, European attempts in direct defiance of Washington remain uncertain in outcome.

In any event, European resolve – while of some use to Beijing in the broader chess games of international politics – cannot offset the continuing national need to secure energy.

In continuing a reliance on Iran, there remains too much left open to chance.

While opinions in the American oil patch will support the move to ease trade tensions while also opening up the Chinese market for exports, there is a matter of some concern.

And it involves something I call the “volume ceiling.”

The Volume Ceiling

Currently, LNG exports to the world market by the U.S. are still in their infancy.

While there are clear indications that volume will be increasing steadily, it is not an overnight transformation.

There are only a few companies now signing multi-year export agreements, and the amount that can quickly be moved to China is debatable.

The issue on the oil side is somewhat different.

American exports have been an increasingly important element in the global market (to the frustration of OPEC and it attempts to limit what is available).

Exports last week exceeded 2.5 million barrels a day for the first time.

Unfortunately, given the state of U.S. oil export facilities, a volume ceiling is approaching fast.

There is a strong consensus globally that the U.S. will soon surpass Russia as the world’s largest oil producer.

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